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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Coeden co (12/12)
Dear sir,
I have a qn ( rather silly one I suppose on the WACC calc in this one)
I have calculated the market value of equity as 42,614,000$ and market value of debt as 42,298,200$ and here’s my question,
The answer says that the proportion of debt- equity is 50-50, which I understand, what I don’t understand is why is it calculated this way?
cost of capital:
10·6% x 0·5 + 4·9% x 0·5 x 0·8 = 7·3%?
I calculated it as,
(10.6% *4261.4/ (4229.82+4261.4) +
4.9% *4229.82/(4229.82+4261.4) )*80% and my WACC says 9.6%
So, what did I do wrong?
Thanks.
Sorry, I have figured it out. It was a calculation mistake.
But I have another qn though. Why don’t we multiply the value of debt by (1-t)? why do we multiply the value of debt at the end instead by (1-t), as in this qn,
we dont take it as
10.6% *4261.4/ (4229.82 ( 1-20%) +4261.4)
and instead we do this
4229.82/(4229.82+4261.4) )*80%?
It doesn’t make sense.
Thanks
The multiplying by 80% (or 0.8) is actually multiplying the 4.9%.
4.9% is the pre-tax cost of debt, and we multiply it by (1-t) to get the after-tax cost to the company.
so we won’t need to multiply denominators and numerators by 0.8 like we used to before?
I don’t know what you mean by ‘like we used to before’. We never do that in the calculation of the WACC. Are you sure you are not confusing it with the asset beta formula, which is nothing directly to do with the WACC calculation?